The Average Accounting Return
1. The annual, end-of-year, book-investment accounts for the machine whose purchase your firm is considering are shown below.
|
Purchase Date
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
|
Gross investment
|
$16,000
|
$16,000
|
$16,000
|
$16,000
|
$16,000
|
|
Less: accumulated
|
0
|
4,000
|
8,000
|
12,000
|
16,000
|
|
Net investment
|
$16,000
|
$12,000
|
$ 8,000
|
$ 4,000
|
$ 0
|
If your firm purchases this machine, you can expect it to generate, on average, $4,500 per year in additional net income.
a. What is the average accounting return for this machine?
b. What three flaws are inherent in this decision rule?